The housing recovery remains on track. But high levels of student debt threaten to hang over the residential real estate market for many years, acting as a drag on both household formation and higher prices.

At the height of the housing boom, the U.S. was producing 1.4 million additional households every year. That figure plunged to 500,000 in the Great Recession. The number of new households is expanding again but remains stuck at 700,000—half the peak level. One big reason is underemployed new college graduates struggling with student debt and unable to contribute to the economy.

“Three-fourths of the fall in household formation can be directly correlated to student debt,” Rohit Chopra, student loan ombudsman at the Consumer Financial Protection Bureau, said at a conference last week. His comments were reported on Mainstreet.com.

Chopra said he was seeing signs of far-reaching economic drag due to student indebtedness but that “the impact on the housing market is the most troubling part.” Many recent graduates don’t have the disposable income or the credit score needed to buy a house, Chopra said. So they boomerang back home.

Student loans now top $1 trillion, and 81% of the most burdened borrowers—those with more than $40,000 of student debt—have private loans with interest rates of 8% or higher, according to the CFPB. Unlike federal student loans, private loans not only cost more they offer less repayment flexibility and typically cannot be discharged in bankruptcy. Almost all student debt is difficult, if not impossible, to refinance—sticking borrowers with high rates in a low-rate environment and adding to the economic drag.

In the ombudsman’s annual report, released Wednesday, Chopra detailed the problems that borrowers have trying to pay down their private loans, and how a seemingly intentionally confusing system often holds borrowers hostage. In the end this takes a toll on their credit score—and on their ability to buy a home or anything else with borrowed money.

“Repaying a student loan should be simple,” CFPB director Richard Cordray said in a statement. “When servicers process payments to maximize fees and penalties they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability.”

In the report, Chopra drew ominous comparisons between student debt today and mortgage debt before the housing collapse:

Many of the private student loan complaints mirror the problems heard from consumers in the mortgage market following the wake of the financial crisis…Consumers had difficulty refinancing their mortgages or had problems obtaining a modification of mortgage terms. Improper payment processing sometimes led to improper foreclosure…The similarity between private student loan complaints and problems uncovered in the mortgage servicing industry suggests that many student loan servicers are not taking proactive steps to avoid a similar breakdown.

Little wonder that some have called student loans the next debt bubble. That may or may not be the case. But it seems clear that student debt, and the obstacles to managing it well at the borrower level, will be a drag on the housing recovery and the economy for years to come.

Dan Kadlec is a journalist who has written about personal finance for TIME and other outlets for 25 years. He is the author of three books, a leading voice in the global financial literacy movement, and strategic adviser to the National Financial Educators Council.

Kadlec's latest is A New Purpose: Redefining Money, Family, Work,Retirement, and Success

Something silly has been going on the side of government.
Student loans are a drag on economy, but what about payday loans that the most
students taking to get out of their financial problems? These problems are not
being reported, and the focus is only on student loans so far, but a new
personal finance explosion is expected in the near future due to students’
large involvement into payday loans.

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I am already in crisis with mine, $70000 in debt and I know Im not alone. I graduated with honors but that didnt help finding a job in this economy. I see several reasons for this but I am looking for a solution not only for myself but future graduates. Some of us look for any temporary relief when behind. Theres a website gofundme.com where you can help out struggling people with student loans and other things.

Restore the bankruptcy protections that were improperly removed from both federal and private student loans - period, end of discussion - if you don't, then we'll just have to start a new country - can't pay back what one cannot afford to pay back - it's not rocket science.

I'm pretty jaded when it comes to people griping about the "moral hazard" of higher education. Those of us that were not privileged enough to have our educations bankrolled by our parents had no choice but to borrow huge sums of money to finance an education we were told to obtain via cultural mores. I have an undergrad and graduate degree but am unable to find well paying work in my field (mental health and education). There are deeply seeded problems with the way higher ed. is financed in this country and it's the bankers' faults. Essentially, a system was established in order to create a neo-feudal society in which those with the most continue to reap the fat of the land while those of us with literally nothing have to beg for the trimmings. The American dream has been shattered in the last decade and those responsible don't want to accept their moral hazard in facilitating it.

My wife and I pay more on our loans than we do on our mortgage. To all those who say "Oh, well you should've gotten a degree that pays well." I have my degree in business it took me two years to get a job that utilizes my degree. On top of that, my pay is still pretty craptacular.

My generation is graduating into an environment where full time work is hard to come upon and wages are low. We can't just graduate and hold out or hands and receive a high paying job like boomers seem to think we can. And they're the same ones calling us entitled.

I'm just out here working 50+ hours a week with low pay just to stay afloat. If I had disposable income, I probably would go out and pump up the economy. My hands are tied, though.

Borrowing to finance an education / degree that leads to a low wage job is the problem. It is really no different than borrowing to buy new car that decreases in value faster than the loan is paid down. But soon it will be suggested that it's in the best interest of the nation that we bail these student loans out.

@JohnDavidDeatherage@TimJohnson And where was our guidance? Clearly out doing something else. We'll make our own way now that we have to, but it will be a way that is indifferent to you and your protests about how the world should work.

*Yawn* We can no longer minimize the student loan debt crisis with these narrow-minded "personal responibility" antics. We arw talking abt a crisis of enormous magnitude, and pointing fingers at thw individual borrower is off the mark. Not only that, this system was well crafted in order for a select group of powerful institutions (and people a la Alber Lord) to makes LOTS of money off borrowers AND taxpayers. It is loan sharking at its best, much like the payday loan scandal.

I have friends whose kids are in college or soon to be. It's something that is talked about. Don't borrow money you'll have trouble paying back. Don't pursue a degree that won't lead to a better paying job. in other words, don't borrow a bunch of money to be an Art History major.

@TimJohnson I have one more thing I want to say. It was nice exchanging ideas with you. We disagreed but kept a civil dialog. With the anonymity of the web, too many people feel the need to vilify the other side, to engage in ad hominem attacks. Thanks for pleasant exchange of ideas.

@JohnDavidDeatherage@TimJohnson I think it's more complicated than that, but I believe you hit on a major theme in all of this, and painted the picture pretty well. Of course, you also pointed out that this wasn't the students' fault, but the system is basically broken and set them up to fail.

@TimJohnson @JohnDavidDeatherage How much did your degree cost? That too is consumption.

Part of the problem is we make money cheaper for students to borrow for their educations, Universities react in a rational economic actor way; their raise their prices. That (in my opinion) is the heart of the problem. (1) We've made borrowing money cheap for students. (2) students have more money to spend on an education. (3) so universities raise their prices (4) students just borrow more... and now the problem is degrees cost more than the jobs they will produce.

That demonstrates the law of unintended consequences; by trying to help students, we have in fact hurt them.

@JohnDavidDeatherage@TimJohnson This is a good argument, and I appreciate your perspective. My biggest issue is that our greater economy is based on consumption, and I'm personally worried about what happens when you have a large portion of the population unable to consume. This affects everyone, maybe drastically. So while it sucks for me and people my age right now, it may really suck for everyone in a few years.

@JohnDavidDeatherage@TimJohnson I have a job, but large loans as well. A house and kids is going to come much later for me than my parents, or most of my parents generation. I consider myself a lucky one compared to many my age, but the economy will be forced to deal with the fact that we simply can't buy in until much later in life. Who will that affect most? Probably everyone.

@JohnDavidDeatherage@TimJohnson Engineering. Your point would be more valid if the problem wasn't so pervasive. If it was isolated cases of bad decision making, then yeah, it was bad individual choices. Unfortunately, the entire system was rigged and it was a bad overall policy that my generation was pushed into. Many people my age would be better off -along with the whole country- if the trades were promoted as well. But now we have a shortage of skilled labor and a surplus of underemployed college grads, and the loan holders are the only ones benefiting. Until we can't afford their mortgages and car loans...